Canadian Telecom Carriers: Down with Subsidies

Subsidies have been awkward for carriers for some time now. Recently, T-Mobile’s CMO Cole Brodman said that carrier subsidies actually “distort” device costs. Worse, customers “devalue completely the hardware they are using.”

In Canada, subsidies are often used as incentives to lure customers into longer-term contracts in exchange for a reduced price on the device. Rogers Communications, for instance, offers an iPhone 4S for roughly $159 if customers sign up for a three year deal.

The trouble for the carriers, now that smartphones and upmarket gadgets are becoming more common, is that customers are signing up for the contracts, getting the iPhones and not using piles of data. In some bewildering cases, customers purchasing smartphones actually only use their devices to place calls. Imagine that.

In essence, that means that the carriers don’t make as much money on the device due to lesser data usage and, as such, the appropriation of the device isn’t as lucrative for the telecommunications titans.

Rogers, for instance, saw its average per-user revenue drop 2.26 percent from a year ago. As Gaurav Kheterpal reported yesterday, Rogers saw its latest quarterly profit drop by 16 percent. The trouble, to some extent, was the fabled “increased competition” and the fact that customers were going for dreaded “basic” data plans and not the gargantuan data-munching plans the carrier would undoubtedly favour.

Interestingly, The Globe and Mail reports Rogers CEO Nadir Mohamed as stating that “customers expected subsidies in exchange for their heavy use” when smartphones first broke into market. This is, at least on its face, a half-truth. Carriers certainly used subsidies as ways to entice consumers into signing long-term contracts for services, only those didn’t turn out to be as profitable as once thought and the carriers now want to flip the script.

The game plan appears to be a move away from subsidies and to more lucrative data plans. Canada’s telecommunications sector will continue to satisfy shareholders first and customers second, of course, and that could mean the subsequent annihilation of subsidies and amplified pricing of devices that customers are demonstrating they’re going to buy in droves regardless of price.